The Truths and Myths of Owning Multiple Locations

There's really no denying that the dental landscape is starting to welcome more corporate players and DSOs. And that trend will probably only pick up as.

Time unfolds. And so a lot of folks are incentivized or attracted to feeding DSOs or being bought out by assembling a group of multiple dental practices for sale up to a dso.

Or they think that it's going to just having multiple practices is going to make them more money. So there are four reasons why people hear that you should twice the practice, twice the profits. That's one reason makes sense, right? You can have the associates do all the hard work and you get mailbox money. You just sit at home and take it in. Great dentists must be great business managers. They're the smart clinicians. Of course they should be able to run a business. And lastly, everyone's doing it and everyone's telling you to do it. You go to the trade shows, you hear the conference, Tony Robbins says to do it. You get psyched, you're going to get this multiple and live in the Caribbean.

And.

I'm here to tell you that generally.

These are myths. There will be exceptions to this, but I'll tell you why it often fails. There will be some people who figure out the perfect mousetrap, and that's why corporatization will continue, because some people figure out the correct formula. But it's not true. That, and at least in our experience, you have twice the practice, twice the profits. And the reason is you only have two hands. And chances are if you have one office, those hands are full time busy in that one office. But then if you get a second office, you have to hire a second set of hands. And in a general practitioner's office, traditionally, you know, you say you have $100 of revenue, you have about $60 of operating expense, $40 left over of operating profit. Great. That operating profit is supposed to pay you as the practitioner and the bank if you still have a note left on it. But at the second practice that you just bought, you saw that banknote. But of that 40%, you now have to spend 30% of it paying an associate, right? So now that 40% has dropped down to 10% leftover for you. You. And typically your practice purchase loan is going to take around 12 to 14% of your cash. So you just went negative. In addition to that, this associate is not an owner. They're clocking in, they're clocking out. They're not dealing with the HR issues, they're not opening the mail, they're not asking the patients to pay, they're getting paid on production. And that's it.

There's also a fallacy. You know, dentists are very smart people, very accomplished, but not all of them are great business managers. And it's just very, it's just physically difficult to manage practices in two different geographies, even if it's 20 minutes apart. Different cultures come up, different systems. You have to spend time in both, you have to travel, and it just becomes a lot. And at the end of the day, you know, you only have seven days in a week. So a lot of dentists end up getting burnt out. And then number four, in the ecosystem around Dennis, there are a lot of people who stand to benefit from you having multiple offices. In fact, we charge extra if people have multiple offices just because there's more credit cards, there's a separate payroll, all this other kind of stuff going on. But as a fiduciary, we have to put our clients interest above ours. And for most of them, having multiple locations doesn't make sense. And so we advise against it. But other folks make profit. The broker who sells you the practice makes a profit off the person who sells you the CBCT makes additional profit off of it. The bank gets to make an additional one. The attorney makes more. Everybody's winning here except the dentist who typically ends up making less.

So let's talk about if you want. If your objective is to make more money, there's an easier way. So option one, you could increase your personal production by 117,000 in this hypothetical scenario and option two by 705,000. It's about six times more work to do the option two. But what I'm going to show you is that both lead to the same net profit. If this in option two, you're generating it by having it second office. So let's look at these columns here. Column one is today and it's unlabeled. That's a million dollars. You have 35% operating profit, but you want to make more. Okay, option one is, hey, just up your current game in your current place by 117,000. Now your fixed costs don't change, your rent doesn't go up. If you're seeing more patients, great. And your variable costs, maybe a little bit more labor, a little more dental supply go up a little bit too, but not that much. And voila, most of that 117,000 falls to the bottom line and you've made $100,000 more than you did in just your baseline scenario. And the reason is because the owner in any business gets paid last, employees get paid first, rent gets paid, yada yada. But once you hit that certain critical mass or escape velocity, whatever's left is mostly the owners. So adding those few extra dollars on your revenue line, once you've gotten past break even, those are really the dollars that benefit you. Not all revenue dollars are created equal. Those later ones are much more valuable. Now compare that to the multi office scenario, option two. Yeah, your collections have gone way up $1.7 million. And yeah, of course your variable costs at 15% have kept pace with that. So that's a little bit more. But the real killer here is that your fixed cost doubled, rent doubled.

Your telephone service doubled. Some of these things that you just can't get away from when you have multiple locations. So you're putting in way more work, but you're making just as much as if you had just upped your game a little bit in option one in your, in your single practice. Now, here's the thing that we're not showing on here, which I think is the final nail on the Coffin on option two is you bought this practice probably for $800,000, right? Because maybe it was producing a million or the second office or whatever it was, but now you have a note that you've got to pay back so that 450 really is going to get chipped away.

By a loan payment, which is pretty significant, like I say, about 10, 12, 14% of your revenue, so that you'll end up making less and even sometimes go negative on the second office if it's looked at a loan and really doesn't make a lot of sense.

And here we're just highlighting the comparisons between the different boxes.

Okay, just another way of slicing this again. In the first column you'll see that, you know, we've got our baseline million dollars of collections, but by simply increasing your collections in your existing office, 20% up to 1.2 million, or even an additional 25% up to 1.5, that's where your big money gains are going to go because you've got your fixed cover cost covered. Your variable costs change a little bit, but you don't have that doubling of fixed costs. You don't have that note that you've got to pay. So that's where you get those big increases in net income.

And then some final thoughts on what we've seen from people who have multiple practices. Lot more stress, they actually make less money, they save less, and everybody thinks that they're doing great. They put on the auspices of wow. I own a lot of practices, I'm doing great. But the truth is when I every single multi group, multi office practice that I've seen, there's one strong one and then the neglected offices, or at least the offices that have the associate that are making no money, and then what often ends up happening is the same broker that sold it to you, this second office or third office, you list it again when you're tired of it with that same broker and they get paid again. So they love it.

I think one thing that I'll mention too is the reason that why this is being driven, of course is private equity firms, which are often just wealth funds that people or institutions invest in because they are chasing higher returns than the stock market will give them. And they want to put it in the hands of people who will find the next Google and make their money grow significantly. That's what's pulling all of this up. And private equity, I doubt they will, but they may lose interest eventually in the sector. So these huge purchase multiples, purchases of profit, multiples of profit that you hear about at conferences may stop. And oftentimes that when a DSO does buy you out, it's kind of a deal with the devil because they'll give you less upfront in terms of cash on day one than you would have gotten in a private sale with the promise down the line of two things. One is an earn out, which is kind of a performance based payout if you know, if the performance picks up and you save expenses, et cetera. But sometimes they put handcuffs on how you can operate the practice and its performances and therefore your earn out is out of your control. And then the other carrot down the road is the big sellout when they give you a portion of their dso, their portion, their parent organization. And you're going to make a huge multiple when they sell that down the line. But again, the music may stop just like it did in 2007 with the housing crisis. You know, if funding dries up, that may change. So when you get approached with those things, you need to mentally discount or apply a probability factor to how much you may actually get if a sale ever does happen.